HMRC releases crucial technical note on pensions and Inheritance Tax

Experts at Irwin Mitchell warn that HMRC’s new technical note for IHT on pensions, highlights a considerably more complex and administratively demanding landscape for families dealing with estates that include pension assets.

While the technical note provides much needed detail on HMRC’s approach to the April 2027 IHT reforms, it raises practical concerns about how estates will be administered in real life - particularly for families and executors managing incomplete information at a time of bereavement.

A central issue is HMRC’s expectation that personal representatives take “reasonable steps” to identify the deceased’s pension savings, but without any help yet from the Pensions Dashboard which is designed to reconnect individuals with lost pension pots. In practice, families often face fragmented records, historic workplace schemes and multiple providers. With no definitive guidance yet of what constitutes reasonable steps, executors risk uncertainty, delay and increased personal exposure when administering estates. The manual refers to “looking through all the deceased’s papers”, but what about online records, and the passwords needed to access them?

The note which is clearly written and helpful in explaining a lot of detail, sets out the scope of pension benefits that are caught, including lump sum death benefit payable from defined benefit schemes as well as defined contribution (money purchase) schemes. While ongoing income streams - such as pensions, dependants’ scheme pensions and joint life annuities - are generally treated differently, lump sum benefits are included. This increases the risk of unexpected inheritance tax outcomes, arising from benefit choices that   arrangements were potentially made many years earlier.

Further complexity arises around the valuation of pension assets. This includes how and when estimates can be used, and how values should be managed where information is incomplete or still emerging. A portfolio of quoted stocks and shares is straightforward to value, but commercial property held in SIPPS or a SSAS is much more difficult. These issues have the potential to slow down estate administration at key stages.

The technical note also outlines new information sharing requirements, including disclosure timetables and the identification of personal representatives, or prospective personal representatives where no will exists. These requirements raise challenges for more complex estates, including those involving trusts, deeds of variation or contested administration, with the IHT on both the estate and any pensions all due 6 months after the death.

In addition, the HMRC manual sets out its emerging framework around personal representatives directing pension scheme administrators to withhold up to 50% of a pension for 15 months to cover the IHT (and any interest on the tax). This includes who may give notice and the formalities required. These provisions are invaluable for giving PRs confidence that they can pay the tax on the pension and help balance the needs of the beneficiaries of both the estate and the pension (which may be different). Executors will need to navigate these processes carefully to avoid inadvertent delays or compliance issues.

Penny Cogher, pensions partner at Irwin Mitchell, said:

“HMRC’s technical note is an important step forward for the new IHT pensions regime, but it does demonstrate how technically demanding pension related inheritance tax will be in practice.

 

“Pension scheme administrators will be looking for scheme members to take more upfront responsibility with their pension savings in this regard and for all ages of scheme members to have clear, up to date, expression of wishes forms lodged online with the pension providers so, on being notified of a death, the pension providers can rapidly assess the position and make a decision as to who should receive the pension benefits. If the pension benefits are to be paid to the spouse, then importantly, even under the new regime, no IHT is payable on those pension benefits, due to the usual spouse exemption from IHT.”

Naomi Neville, a partner at Irwin Mitchell Private Client Advisory, also highlighted the interaction with charitable giving and the reduced inheritance tax rate.

“The HMRC technical note confirms that pension assets are taken into account, with the deceased’s free estate, when assessing eligibility for the reduced 36% inheritance tax rate where 10% of an estate is left to charity. Professional bodies have asked that a separate component part for pensions is created to keep the free estate separate. For families, this increases the risk that existing plans fall short unintentionally, leading to higher tax bills and difficult conversations after death.

 

“Executors are being asked to gather, value and share information that can be difficult to access, at a time when clarity and reassurance matter most.

 

“The real risk for families is delay, uncertainty and outcomes that differ from what they reasonably expected when estate plans were put in place.

HMRC has indicated that this technical note forms part of a wider programme of work, with further regulations and public facing guidance expected ahead of implementation from April 2027. In the meantime, families may wish to review pension arrangements, consolidation and estate plans to reduce the risk of delay and surprise.